Many of the deficiencies of a trust can be overcome with the assistance of an estate planning attorney and the execution of additional estate planning documents, such as health and financial powers of attorney and a living will. Furthermore, the many benefits of a trust far outweigh a trust’s few shortcomings. Thus, you should still consider creating a trust after you have discussed the advantages and disadvantages with your estate planning attorney.
What Is a Living Trust?
A living trust is a legal document, or trust, created during an individual’s lifetime where a designated person, the trustee, is given responsibility for managing that individual’s assets for the benefit of the eventual beneficiary. A living trust is designed to allow for the easy transfer of the trust creator or settlor’s assets while bypassing the often complex and expensive legal process of probate. Living trust agreements designate a trustee who holds legal possession of assets and property that flow into the trust.
Advantages of a living trust
- Avoids probate but necessarily estate taxes
- Administer property in different state with one document
- Manages business and personal affairs during your life
- Manage asset if you become incapacitated
Disadvantages of a living trust
- Expensive to draft
- Involves cost to update
- Expenses can outweigh benefits
- Not court supervised
Types of Living Trusts
Revocable living trust
The trust settlor can designate himself or herself as the trustee and take control of assets within the trust. However, this stipulation means the assets in the trust remain a part of the trust settlor’s estate, meaning the individual may still be liable for estate taxes should the estate be valued beyond the estate tax exemption at the time of death. The trust settlor also has the power to change and amend trust rules at any time. This means the trust settlor is free to change beneficiaries or undo the trust altogether.
Irrevocable living trust
The settlor relinquishes certain rights to control over the trust. The trustee effectively becomes legal owner, but the individual would also reduce their taxable estate. Once the trust agreement for an irrevocable living trust is made, the named beneficiaries are set and the settlor can do little to amend that agreement.
What is a Settlor?
A settlor is an entity that establishes a trust and legally transfers control of an asset to a trustee, who manages it for one or more beneficiaries.
Four things a living trust does not do
It does not control medical decisions.
A living trust is not the same as a living will. Although the names are similar and they are both legal documents, they do very different things. A living trust lets you keep control of your assets. A living will lets you keep some control over medical decisions, but it is very limited—it only lets others know how you feel about life support in case of terminal illness. In addition to a living will, you should consider executing a healthcare power of attorney. The healthcare power of attorney lets you give legal authority to another person to make healthcare decisions for you if you are unable to do so.
It does not protect your assets from creditors while you are living.
Because a living trust is revocable, you still have control of your assets and have access to them at all times. Even the Internal Revenue Service considers a revocable living trust to be a “non-event” because you can put assets in and take them out at any time. If you still have access to your assets, so do your creditors. However, you can choose to draft your trust so that after you die, assets that remain in your trust for your beneficiaries are protected from their creditors, including divorce proceedings. If you are concerned about asset protection, talk to your estate planning attorney as soon as possible about your options.
It does not help you qualify for Medicaid.
Medicaid is a federally funded healthcare program that was created primarily to provide healthcare services for the poor. It may also pay for an unlimited number of days of nursing home care, which makes it appealing to some people who are not poor. To qualify for Medicaid, you can only have a limited amount of assets and receive a certain amount of income, some people think putting their assets into a revocable living trust will help them qualify for Medicaid because the assets are no longer titled in their individual names. But because a living trust is revocable, you still have control of your assets and have access to them.
It has no effect on your income taxes during your lifetime.
You must still report any income you earn each year and pay any taxes due on that income. As long as you are living, you continue to use your own Social Security number and file the same income tax returns. (A separate Tax Identification Number and separate tax return for your trust are required only after you die.) Some irrevocable trusts may be able to save income taxes.
Get help
If you would like to learn more about the necessity of estate planning, any one of our estate planning attorneys would be happy to assist you.
